Social Entrepreneurship and Venture Capital

Research Paper on Social Entrepreneurship and Venture Capital/Start-Up Funding

Nothing can be nobler than wanting to improve the conditions of the world both on an environmental and sociological level. Those individuals and businesses that choose to take on society's problems are a special breed and they face an uphill battle not only in performing their work, but finding the financial resources to grow the business so that it can fulfill its mission. This paper will examine the industry of social entrepreneurship and how venture capital funding is playing a role in improving life for all.

First, to define what a social entrepreneur is. According to one widely accepted definition, social entrepreneurs "adopt a mission to create and sustain social value, act boldly without being limited by the resources currently in hand" and "exhibit a heighten sense of accountability for the outcomes created."(Dee, Gregory). The majority of social enterprises are legally established as not-for-profit organizations, but a growing number have set themselves up as for-profit firms, with the owners agreeing that the business profits are to be reinvested in continuing the organization's social objectives.

Social enterprises face two ongoing hurdles towards achieving their mission, goals and objectives. The first is the nature of the business. Social firms are often referred to as "double bottom line" businesses, meaning they are designed to make a profit while fulfilling a social mission (Clark, Gaillard). This dual goal can be seen as paradoxical, which is often difficult for both employees and funders to come to terms with making it harder to motivate all parties towards achieving sustainable profits. The second hurdle is that the sources of funding for social businesses are more limited than the for-profit arena. Foundations and government grants have traditionally been the primary source of funding, but they provide mainly short-term grants. Social entrepreneurs need medium to long term financing.

Despite these hurdles, the social entrepreneurship industry is growing. Just a decade ago virtually no business schools focused on social causes and business. Today, most top business schools do, such as Stanford University's Social Innovation Review which established the Global Entrepreneurship Monitor to measure social entrepreneurship around the world, and Harvard University's Initiative on Social Enterprise. In addition, the number of nonprofits operating in the US grew by 74% between the years 1987 and 1998. (The Independent Sector Press Release, July 2001).

The industry has grown for several reasons. Problems with declining natural resources and global warming have given rise to more organizations dedicated to preserving the world's environment, likewise, social and world wide issues such as AIDS, poverty and terrorism have led to more organizations being created to help combat these issues. Corporate scandals and run away executive compensation have given businesses focusing on philanthropic endeavors more media prominence as the "good guys", which has raised the public's imagination and support.

There is growing pressure for corporations to focus on their social impact coming from shareholders and customers as well as from concerned employees within. Thus, to help improve their images, many corporations have established foundations to provide funding to businesses working on social issues.

To be successful, social entrepreneurs need more than just a noble mission. With the down turn in the economy over the past five years, social enterprises have experienced major government funding cuts and increased competition for funding from foundations. In order to support operations, many social enterprises have to diversify their revenue streams. This means creating a funding strategy that includes fee-for-service along with traditional grants, and financing strategies based on courting individual donors...

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